When the UK government announced
its austerity programme in 2010, it believed that private investment would help
fill the gap in demand created by cutting public spending, and in particular offset
its very large cuts
in public investment. That did not happen, and according to OECD forecasts, is
not going to happen in a significant way anytime soon.
 |
UK Investment
Growth (Source, OECD Economic Outlook June 2012)
|
The obvious response is for the
government to borrow to increase public investment, particularly when it is so cheap
to do so. But that is a no-no as far as the Chancellor is concerned. So around
the time of the budget it announced its solution to this dilemma. It would provide government guarantees to private investment projects, but it would also encourage the private sector to fund traditional public sector investment, like roads.
Jonathan Portes is right
that this is a victory of sorts. In particular, it suggests the government believes
monetary policy will neither be sufficient to bring about a recovery on its
own, nor will monetary policy counteract any attempts through fiscal policy to
increase demand. In addition, as lack of demand is the critical problem right
now, anything that might help should be welcomed.
However, it has to be said that private finance for public investment appears illogical, as Alasdair
Smith argues at the FT today. (See also Martin Wolf earlier.) The only clear ‘advantage’ of this approach is
that there will be no immediate impact on the measured public sector deficit. But
this policy will increase deficits in the longer term. The bottom line is that
taxes will have to rise to pay for this investment, and merely shifting when
the deficit increases from the present to the future does not alter this
reality.
Unfortunately we have been here
before, with the Private Finance Initiative (PFI) used
extensively by the previous Labour government. The consequences of PFI are set
out in the Office for Budget Responsibility’s (OBR) annual look at the long
term position of the UK public finances published
today. It does this in two ways. The first, and most straightforward, is to
project those finances over 50 years, a time period over which accounting
tricks largely wash out. The second is to calculate ‘Whole Government Accounts’,
which attempt to add a measure of future government liabilities to the
published debt numbers. The OBR notes that “If all investment undertaken
through PFI had been undertaken through conventional debt finance, PSND [public
sector net debt] would be around 2.1 per cent of GDP higher than currently
measured.”
But it is worse than an attempt
to fool the public (and presumably the markets) through bad accounting. The
policy is also almost certain to end up costing more. Alasdair Smith suggests
that this could involve borrowing at nominal interest rates of 5-7%, compared
to interest rates on government debt of around 3%. To quote: “Looking at it
another way, the stream of interest and capital repayments that would enable
£20m to be raised from private finance would fund between £27m and £34m of
public borrowing”.
Professor Smith ends his article
with “The OBR should use the platform of its fiscal sustainability report to
give strong advice on how best to finance infrastructure investment.” Unfortunately
for the time being at least he will be disappointed. As I have noted
before, when the OBR was set up the government was very careful to ensure that
its mandate involved crunching numbers but not looking at alternative policies,
let alone giving policy advice. From the point of view of good public policy,
that was a serious mistake, precisely because it makes it easier for the
government to get away with accounting tricks that end up costing the public a lot
of money.
0 Comments